MAIT leads Indian hardware industry in raising alarm on sinking rupee
New Delhi, June 5 2012: The Manufacturers’ Association of IT (MAIT) has sounded alarm bells on the effect on the Indian iT hardware and manufacturing industry of the relentless pressure on the rupee. The Association is joined by leading industry voices as it urges the Ministries of Finance, Commerce & Industry and IT & Com munications to address the critical challenges faced by Indian hardware industry due to the existing foreign exchange volatility. MAIT points out that the IT hardware industry has already proven to be the backbone of nation’s growth as it is critical enabler in enhancing inclusion, reach, productivity & speed in all kinds of economic activities. It is particularly most relevant to all Government projects and programs like those of Education, e-Governance, Healthcare, Financial Inclusion, etc. as more and more use of technology is being adopted.
According to the estimates of Ministry of IT & Communications, the demand for IT hardware & Electronics is expected to touch $ 400 billion by 2020 in India. $ 20 billion worth of IT Hardware & electronics will be imported to cater to this need in 2020. Electronics imports may thus, exceed oil imports and add drastically to the deteriorating fiscal deficit.
The industry suffered enormously in the year 2011-12 due to supply line disruptions caused by Japanese Tsunami and Thailand floods which increased the prices of key components. However the biggest impact to the industry is the Rupee devaluation and industry has been bleeding for last 3 months with all IT hardware companies in red regardless of domestic manufacturers or multinationals as the industry has over 85% import content. Almost 50% of IT Hardware in India is consumed by the Government in the operations as well as in various projects and programs. These contracts are time bound and locked on prices currently.
“A bigger tsunami has hit Rs 700 billion Indian IT Hardware industry in the form of Rupee Devaluation. We are all in red for the last 3 months. Losses are accumulating, causing cash flow challenges and blocking investments. More than 50% of our industry’s consumption is Govt contracts centric. It is impossible to honour such contracts with 10% devaluation in just 90 days. The Forex volatility is an area of grave concern and we are knocking all doors in the Govt. with a strong request to immediately bail out the Indian IT hardware Industry” said Dr Alok Bharadwaj, President, MAIT and Senior VP, Canon.
As a result of the floods in Thailand and tsunami in Japan, last year, global supply chain of components was heavily disrupted. This shortage and disruptions led to acute increase of prices, which have not stabilized with time. The recent union budget increased the CVD which added additional cost of procurements. Supplemented with the extreme depreciation of the INR against the USD, the industry is now struggling with a sharp rise in the price of the components, sub-components & finished IT products. This has posed severe challenges to the Indian IT industry- especially for fulfilling long term projects.
The speakers highlighted that the Rupee against the US Dollar has depreciated steadily over the past one year (from 45 in May, 2011 to 56+ in May, 2012). This 24% devaluation in one year has been amongst the steepest declines among the Asian currencies. During last 3 months, Rupee has slipped by over 10%. Experts expect this volatility may continue for foreseeable future. Ajai Chowdhry Chairman, Department of IT’s Taskforce that suggests measures to stimulate the growth of IT, ITES and Electronics Hardware manufacturing industry in India and Founder and Chairman, HCL was specially invited to share the difficulties Indian IT companies are facing. He said “This is an unprecedented situation arisen due to the hardening of the dollar. Many critical sectors are getting adversely affected. If not corrected immediately, suppliers will shy away causing delays in the procurement process which might impact all major economic activities including Industrial Production. While the industry wants to go all out and support the government in this time of crisis, it is unable to do so because there is no protection against the volatility of foreign exchange. Government must incorporate exchange rate variation formula in all IT hardware procurement contracts or else industry particularly domestic manufacturing will begin to crumble. He assured that the inclusion of the ERV clause will in no way inhibit the growth of the domestic IT Hardware Industry. Further, once the rupee turns around and appreciates against the USD, the industry will give the benefit back to the government, as it has done in the past”. S. Rajendran, Chief Marketing Officer, Acer India said "The impact of Rupee devaluation on the IT industry has been very severe. Hence it is imperative that the pricing be indexed to reflect the reality. There are numerous large long-lead Government projects, which currently are facing execution challenges since price retention is both impractical and unsustainable for an industry which already operates on wafer-thin margins.”
MAIT made the following 4 recommendations to the Government:
• Implement the Exchange Rate Variation (ERV) clause as mentioned in the ‘Manual on Policies and Procedures for purchase of Goods’ released by the Department of Expenditure, Ministry of Finance. In fact, the purchase organisation should quote an appropriate exchange rate on the date of tender release so that the vendors can apply accordingly. This should be applicable for long term and short term contracts.
• For the tenders that have been awarded and are in implementation stage, give an option to the vendors to ask for inclusion of this clause on ERV. To begin with, all DGS&D rate contracts should be revised with that clause. This should then be followed for other tenders and state Government nodal agency contracts etc.
• To mitigate some of the impact of component price escalation(e.g. in hard disk) and impact of exchange rate volatility, import of raw materials should be exempted from CVD and SAD for a period of next 4 months (and some period thereafter should the situation persist). This will also help domestic manufacturing which has been hit harder by these supply chain disruption than the international companies with larger procurement clout to ride the current situation.”
• Extend the 35% abatement concession to all IT hardware devices particularly laptops, printers, scanners which are given just 20% abatement. This can be done immediately through a notification of CBEC as was recently done to rationalize flat panel monitors and Multifunctional devices.